India urges resisting gold as currency slumps

Bloomberg

Indian policymakers are urging citizens to resist buying gold and boosting scrutiny of speculative currency trades after import curbs and US dollar sales failed to stem the world’s biggest currency loss.

The rupee fell 4.9 percent last month, the worst performance among 78 global currencies tracked by Bloomberg, as the US Federal Reserve signaled it may pare stimulus measures this year.

The currency plunged to an all-time low of 60.7650 per US dollar on Wednesday last week.

Global funds pulled US$7.1 billion from Indian stocks and bonds last month through Thursday, leaving the rupee vulnerable to a record current-account deficit, even as the government allowed them to buy more sovereign debt.

Some jewelers plan to stop selling gold coins and bars after Indian Finance Minister Palaniappan Chidambaram asked the biggest bullion-consuming nation to forego the “temptation” and help rein in imports that hurt the currency.

“Policy makers have been resorting to persuasive techniques to stem the rupee’s fall, while much bolder, reformist, steps need to be taken,” Manik Narain, a strategist at UBS AG in London, said in an e-mail interview on Wednesday last week. “There is a real worry among foreign investors that the government will implement meaningful reforms only glacially ahead of elections next year.”

The Reserve Bank of India (RBI) said on Wednesday last week overseas funds must “produce a clear mandate” from their clients to hedge exposure to the rupee using derivatives, and banks must verify that investors hold the underlying local securities.

The statement indicated that the central bank is seeking to check currency speculation, according to IndusInd Bank Ltd.

The RBI has also inquired about foreign banks’ open positions involving the rupee, though the lenders have not been asked to unwind the trades, said two people familiar with the matter, who asked not to be named as the information is not public.

“The RBI wants to be seen to be doing something,” J. Moses Harding, executive vice president at IndusInd in Mumbai, said in a telephone interview on Thursday.

The authority “can do nothing” about such trades as long as rules are being followed, he said.

Chidambaram estimates India needs more than US$75 billion in the fiscal year through March next year to finance its current-account deficit.

The shortfall in the broadest measure of trade widened to a record 4.8 percent of GDP in the year ended March 31 from 4.2 percent in the previous period, official data show.

The RBI has said gold imports account for 80 percent of the gap.

The central bank estimates the sustainable level of the deficit at 2.5 percent of GDP and says the gap is the biggest risk to India’s economy, which grew 5 percent in the last fiscal year, the least in a decade.

Standard & Poor’s has said weakness in growth and investment put the nation at risk of losing its investment-grade credit rating.

India has raised bullion import tariffs fourfold from January last year, prompting the World Gold Council to say on June 6 that further increases may boost illegal trade.

The central bank placed restrictions on overseas purchases on a consignment basis and limited imports for local use against cash only.

Even so, gold imports surged in April and May as buyers thronged shops for ornaments after bullion entered a bear market last quarter, prompting Chidambaram on June 13 to urge Indians “to resist the temptation.”